Shale Oil Rattles OPEC, may have significant implications for Nigeria in the future

There is, frequently, a debate on whether the world could, one day, find a replacement for sweat crude. What is, however, not disputable is that the discovery of streams of non-conventional fuel will have enormous impact on the demand for oil and gas and, perhaps, the price. Sooner than earlier expected, there is jittery over mind-boggling discovery of non-conventional (especially shale) oil and gas.

Shale oil and gas has received unprecedented publicity in recent months. Media organisations, all over the world, are feasting on the reality of shale oil deposit as well as the possibility of its absolute alternate to crude deposits. And the interesting question (though disturbing in the circle of oil-producing community) is the practicability of using shale extract to power, safely, industrial machines and drive automobiles with minimal extra costs (on the environment, most especially)? The thought of its prospect sends shockwave through countries that depend on earnings from crude oil.

And it did send some quiver last two weeks. The Organisation of Petroleum Exporting Countries (OPEC), a cartel frequently accused of price-fixing, openly admitted it can no longer pretend all is well with its members amidst changing realities, globally. It set up a committee to consider the effect of shale oil on the global market for crude “in not-too-distant future.”

Wikipedia defines shale oil, as unconventional oil produced from oil shale by pyrolysis or thermal dissolution; it is known also as kerogen oil. Through the three processes, organic matter within the rock (kerogen) is converted into synthetic oil and gas. The extracted oil can be used immediately as a fuel or upgraded to meet refinery specifications by adding hydrogen and removing impurities such as sulfur and nitrogen. The refined products can serve the same purposes crude oil serve.

Shale, in its earliest record, was used in Switzerland and Austria in the early 14th century. It was used to light the streets of Modena, Italy, at the turn of the 17th century. The British Crown granted a patent in 1694 to three persons who found a way to extract and make great quantities of shale deposit out of stone. Later sold as Betton’s British Oil, the distilled product was said to have been used by persons in Aches and Pains with reasonable benefit.

Modern shale oil extraction industries were established in France in 1830s and in Scotland during the 1840s. The oil was used as fuel, lubricant and lamp oil. During the late 19th century, shale oil extraction plants were built in Australia, Brazil and the United States. Also, China, Estonia, New Zealand, South Africa, Spain, Sweden, and Switzerland produced shale oil in the early 20th century.

But the discovery of crude oil in the Middle East in the middle of the century crippled most of the shale extracting companies, leaving only those in Estonia and Northeast China to stagger into 21st century.

Most recently, in response to rising cost of crude, interest in shale oil utilisation has been renewed. Shale deposit in the United States, which started like a fairly tale, is driving the country’s breakthrough in energy sufficiency, with a global energy strategist, Dr. Kent Moors, predicting that it may not be lifting a barrel of crude from the international market by 2050.

At least, US’ medium-term plan is to achieve self-sufficiency. While President Barack Obama, in the past few years, stepped up campaign towards achieving key production targets, the North American country has, in earnest, started cutting down on importation. Its production has risen to a 21-year-high as a new combination of technologies has unlocked large deposits previously trapped in shale rock in North Dakota and Texas.

US mastery of hydraulic fracking (or fracturing) and horizontal drilling techniques has led to a slump in energy imports from some OPEC nations, most notably those in Africa, which typically produce lighter grades of oil similar to that of the North America. US crude production jumped 20 per cent in a year to 7.37 million barrels a day in early May, the highest level since 1992, said the country’s Energy Information Administration data. Consequent upon increase in production, exports from three of OPEC’s African members — Nigeria, Algeria and Angola — to the US have fallen to their lowest level in decades, dropping by 41 per cent in 2012, as established by the US Department of Energy.

While shale has revolutionised the world energy sector in much of North America, Britain and Europe move with caution. In Britain, the government has been trying to balance the need to find alternative sources of energy with growing concerns about the environmental friendliness of hydraulic fracturing, the technique used to extract the gas. In spite of that, the country seems set for the US-style shale boom. IGas, an energy firm exploring the UK’s shale gas, said it found a deposit containing as much as170 trillion cubic feet of the natural resource in its licensed area in northwestern England. This is far higher than nine trillion cubic feet it earlier estimated.

IGas has been drilling in the Bowland basin, a large rock formation that stretches across much of England. The company’s Chief Executive Officer, Andrew Austin, suggested the entire basin could contain 500 trillion cubic feet.

“Even if the industry can only extract a fraction of that, combined with North Sea reserves, it could make the UK self-sufficient in gas for decades to come,” Austin disclosed last week.

Another company, Cuadrilla Resources Incorporated, which is exploring the same basin from a different point, announced earlier that it has located 200 trillion cubic feet of in-place gas.

Britain currently uses about three trillion of gas yearly and imports roughly half that amount. Normally, about 10 to 15 per cent of in-place gas is extractable. This implies that if Bowland is as rich as Austin suggested, it could feed, at least, 50 trillion cubic feet into British economy.

The cheering news will certainly add to an already heated Britain’s long-simmering debate about the future of shale. But it has succeeded in bolstering the views of those on the positive side of the new development, and reveals that the country has sufficient deposit to power its economy for decades.

Long before now, it has been clear that the fate of OPEC and, ultimately, the survival of its members, lie in Asia. But there is a snag. The Chinese triumph in shale poses a threat.

In China already there’s animated feeling that the next energy gold rush is about to begin. The US Energy Information Administration was reported to have observed that beneath the mountains of Sichuan province, the deserts of Xinjiang and elsewhere, China contains twice the shale gas reserves in the US territory. Chinese natural gas accounts for four per cent of the country’s total energy mix. But the Chinese government promises to double the share by 2015. And that is just for a start.

There’s a lot of excitement about the prospect, said Zhou Xizhou, who heads IHS Cera’s China Energy, a research firm. “In Beijing,” Xizhou noted hilariously: “If you work in energy, you probably receive a shale gas conference notice every week.” That is the level of euphoria Chinese shale gas production prospect has received.

The Asian gaint has 1,275 trillion cubic feet of shale gas reserves compared with 637 trillion cubic feet owned by the US. But output in China has been trickled by a number of factors, including geographical challenge and monopolistic structure of its oil and gas sector.

China country recently outplayed neighbouring Japan to emerge world’s second biggest economy. Economists predict that it would overtake US economy in less than a decade if it sustained last year’s growth momentum. Expectedly, the country wants to chart a path for self-sufficiency in oil production. But just how ready is China, the second oil consumer, is to breaks away from the burden of erratic crude prices and take to the uncommon path to fuel its bourgeoning industries? Producers of crude like Nigeria who take solace in the fast-growing Chinese economy as America takes its future into its hands can only ponder the question in unease.

Obviously, there is growing concern about the fate of economies of countries, which depend on oil revenue for sustenance. Crude oil exploitation and production, a sector said to have absorbed only 0.14 per cent of the labour force, accounted for about 94 per cent of the country’s foreign exchange earnings last year. The statistics has not changed significantly in the past 14 years despite promises to diversify the economy. By implication, a major shock in oil demand or price could puncture the economy, ability of the country to honour financial obligations and capacity of public institutions to discharge their responsibilities.

The new global trend in the sector “is a concern,” Petroleum Minister, Diezani Alison-Madueke, admitted at the recent OPEC meeting. Although she accepted that Chinese advancement in shale discovery could not be overlooked, she was confident that Asia remains alternate market. While shale supply threatens to sap the demand for crude, the minister said the country must, most importantly, “look inward and create alternate markets” in Africa.

But, just how viable is the regional market? In North Africa, there are Algeria and Libya. If Africa becomes a viable market, Nigeria will have to wrestle Libya and Algeria for the North African economy. And, of course, Libya and Algeria have proximity advantage in the area just as the Middle East could also conveniently give a shot.

Today, every part of sub-Saharan Africa smells oil. Angola, Gabon, Guinea Bissau and, most recently, Ghana are exploiting. There are also measures of exploitation or reasonable deposits in Cameroon, Chad, Congo Brazzaville, Congo Kinshasa, Cote D’Ivoire, Niger and South Sudan. There is an ongoing Exploration in Mauritius much as the east coast of the continent is also making positive headway in petroleum.

Thus, Chief Oz Emoyon Iredia, a Port Harcourt-based oil/gas consultant, dismissed the assumption that Nigeria has a market in Africa. He lamented that the country has neglected the development of gas, where lies the future of the country’s petroleum because “crude is cheap to exploit.

“Let us assume we should look into African market, what is the amount of consumption of the regional economy? Angola is producing; Ghana is coming into the market. Cameroon and Chad are producing even though they are small players. Libya and Algeria are in charge of North Africa. Which country is Nigeria going to sell oil to in Africa? Is it Rwanda or Central Africa Republic that doesn’t even have money to cover its essential undertakings? Our best market is still the west. Looking into African market is like shooting ourselves on the leg.”

He noted that adequate local refining that is spearheaded by the private sector remains the most assuring forward-looking strategy. When local refineries come on board, he said, the country would be able to save the huge resources frittered through subsidy payments and feeding neigbouring countries.

He continued: “If the refineries are working and you have government agencies playing regulatory role, chances are that we will be able to manage future shock. There are state-run agencies that are doing well. For instance, the Venezuelan Oil Corporation has fuel outlets even in the United State. Brazilian Petrobras operate both upstream and downstream. But is not a model Nigeria can adopt because of corruption. The surest means of circumventing the danger ahead is assisting private refineries to come on board.”

Also, a lead consultant to the Economic Community of West African States (ECOWAS), Dr. Ken Ife, said the government must be courageous to give grant to operators that got licenses to build private refineries some years back. According to him, the proposed refineries require about N600 billion to come on stream. And the government, he said, must choose between squandering over N1 trillion on subsidy yearly and converting part of the payments to soft loans for the private refinery projects.

Unlike Iredia, Ife said there is, indeed, huge market in Africa for Nigeria’s crude resources but that the market requires immense political will to harness. He suggested that the best way the government could leverage on the regional market is to assist needy countries get facilities from the African Development Bank (AfDB), where it has enormous influence, to build refineries and grow their capacity. After that, he said, Nigeria could sign a crude sale agreement with these countries.

He also noted that the laying of networks of pipelines, in addition to existing ones, could be funded by Nigeria for the purpose of supplying refined products to other countries in sub-Saharan Africa. But before them, he said, Nigeria must grow its refining capacity to harness the full benefits of the value chains in oil and gas exploitation.

Still, Ife is worried that whereas countries such Ghana has be able to diversified such that about 10 products constitute 70 per cent of its foreign earnings, Nigeria’s bunch disease persists with oil and gas contributing about 95 per cent of its foreign earnings.

Oil and gas employs less than 0.2 per cent of the countries workforce; it contributes less than 14 per cent to the country’s Gross Domestic Product. Yet, it is virtually the only source of the country’s foreign earnings. Worst still, the country exports the resources in its crude form while it imports the finished products to fuel its economy. This is the point at which many regard the oil discovery as a curse rather than blessing.

Ife said not until the unfortunate trend is broken and the economy fully diversified, the economy faces gloomy future. He called for institution of the right policies that can promote balance growth and create opportunities for the larger number of people. He wondered how the country expects to experience real growth when policies are skewed to help few individuals feed fat in the face of widespread poverty.

Despite surging shale growth, there are those who believe Nigeria’s market remains intact. The Guardian reported last week that some of the oil companies said they are proud of Nigeria’s sweet crude, which has been categorised as one of the best offers in the international market.

A top official said: “Our traditional customers may have alternative sources, but the quality of the products will always be there. Besides, the need for energy is a global phenomenon so it is not segmented to a certain country or a particular customer. There may be alternatives such as shale oil, but I must remind you that our product is easier to produce and easier to refine, compared to heavy crude.”

Another said: “Shale oil is not really a problem to Nigeria. Losing the United States market does not mean the country can not exploit other markets. Demand for energy is growing worldwide and we can always get markets to fit in, depending on how we position the industry.

President of the Nigerian Association of Petroleum Explorationists (NAPE), George Osahon, stated: “The discovery of shale oil is all over the world, but the United States is the country, which has actually started the production of the commodity. Anything that happens in any part of the world in respect of energy, must affect the global energy mix. For me, there is nothing to worry about concerning the discovery of shale oil. Nigeria should not fret over this new way of oil exploitation. In fact, we should be worried finding out way to continue to be relevant in the global oil market.

“Don’t forget that when it comes to oil and gas, we have not fully exploited what we have in the country. We have so many basins in Nigeria, which have not been exploited. We have shale oil in Nigeria, which can be exploited, but the question is ‘what is the cost of exploiting a barrel of shale oil compared to the cost of exploiting conventional oil?’ What we need to do is to concentrate on exploiting the conventional oil, which is cheaper, before going into the exploitation of the more expensive shale oil.”

Director, the International Energy Agency, Maria van der Hoeven, also allayed fear about the possibility of shale impacting significantly on crude. He said the alternative source would improve global energy supplies but that the importance of OPEC would not diminish, as demand from developing countries is growing.

“Given the known resources in OPEC, the importance of OPEC will not diminish, definitely not, but trade routes will change,” Hoeven said. According to him, shale oil will complement the spare capacity held by OPEC, particularly Saudi Arabia, and this would make the market more comfortable than in the past few years.

Just as the traditional market of crude looks splitting, there is growing worry analysts that the emergence of the same non-conventional fuel could cause ripple within the fold of OPEC. Moors, during an online television show last week, suggested that 80 per cent of the oil Saudi Arabia will be pushing to international market by 2015 will come from non-conventional means. If OPEC has no control over how non-members tackle the growing energy need, it will not, sure, be comfortable with its top member endorsing shale extraction. How is the cartel going to react to members who chose to harness their shale reserve?